Small business startup loans for minorities can be a critical funding source to help entrepreneurs from historically underserved communities start a new business or grow an existing business.
Currently, there are more than 8 million minority-owned businesses in the United States. Yet, those businesses struggle more than an average small business in terms of revenue and access to capital.
According to the U.S. Minority Business Development Agency, minorities own 29% of all businesses, and minority business owners are three times more prone to be rejected for loans than non-minority owners. If those minority business owners are approved, they typically pay higher interest rates on lower loan amounts than do non-minorities.
To encourage minority entrepreneurs to access capital, we have studied and evaluated various loan and financing options below. But before that, let’s find out what actually is a minority-owned business?
What is a minority-owned business?
A business is typically considered to be minority-owned if it is at least 51% controlled and owned by people of particular ethnicities. For instance, to be considered a minority-owned business in New York, business owners must be Black, Hispanic, Asian-Pacific, Asian-Indian Subcontinent, Native American, or Alaskan Native.
A certification declaring your business is minority-owned may require you to qualify for particular minority business loans or programs.
The 9 Best Small Business Loans for Minorities
Here are the nine best small business loans for minorities:
1. SBA 7(a) Loans
SBA 7(a) loans are guaranteed by the U.S. Small Business Administration (SBA), which is a federal entity formed to foster small business growth. SBA 7(a) loans are not particularly for minorities, and any entrepreneur can easily apply for these loans through participating lenders. However, nearly one-third of SBA 7(a) loans go to minority applicants.
You can use an SBA 7(a) loan to qualify for as much as $5 million in capital, making this a good choice for significant investments in the business. The maximum repayment terms typically vary from 10 to 25 years. The best part is that the interest rates on 7(a) loans are some of the lowest around, providing minority business owners to invest more profits in growth rather than paying off debt.
2. SBA Community Advantage Loans
The SBA Community Advantage Loan Program serves to meet the financial requirements of small businesses in underserved markets. This program helps local, mission-based lenders such as nonprofit organizations to obtain loans of up to $250,000 to minorities, women, veterans, and other underserved business owners.
By ensuring up to 85% of the loan amount, the SBA strives to help small business owners who might not fit for traditional financing, so this is an excellent option if you are looking for minority small business loans. You have to prove creditworthiness and your capacity to pay back the loan, but a lack of collateral or balance sheet assets will not stop you from qualifying.
3. SBA Microloan Program
Minority small business owners trying to obtain $50,000 or less loans should investigate the SBA microloan program. Although this program is open to any eligible small business owner, SBA microloans can be a perfect starting point for minorities.
These small business loans contribute up to $50,000 to support small business owners start and grow. The SBA makes these loans through third-party nonprofit lenders. Many of these local nonprofits exist to support minorities and other underserved entrepreneurs. They give management and technical help to small business owners along with the loan.
4. SBA 8(a) Business Development Program
The SBA 8(a) Business Development Program is technically not a loan but a certification program that encourages minority-owned businesses to access federal contracts. In order to even the playing field for small businesses owned by socially and economically disadvantaged people, the government restricts competition for some federal contracts for companies that participate in the 8(a) Business Development program.
In order to pass for this program, your business must be 51% owned by someone from a socially and economically disadvantaged background. Minorities are considered to be socially disadvantaged under federal law. On the economic side, the owner’s personal net worth and average gross income for the last three years must be $250,000 or less, and their assets must be $4 million or less.
If you meet these basic qualifications, you can apply to get certified online, after which you can begin competing for contract set-asides. You can also get help to free business mentorship and training through the 8(a) program.
5. Nonprofit Loans
Several nonprofit lenders offer loans to small businesses. For instance, international lending organization Accion has a U.S. loan program targeting low- to moderate-income business owners who have a problem accessing capital through traditional channels, making it an excellent option for loans for a minority small business. Accion’s U.S. branches offer loans from $300 up to $1 million in all 50 states while not minority-specific.
Another nonprofit lender to look at is Kiva. This organization, built on a social lending model, allows up to $10,000 in no-interest financing for qualified small business owners. First, you must get a small network of your family and friends to lend money to you, after which you can pitch your business idea to Kiva’s network of 1.6 million lenders to get additional financing.
6. Union Bank Business Diversity Lending Program
If you are searching for minority-specific business funding, Union Bank is another good choice to consider. They give business loans and business lines of credit only for minority-owned businesses.
These products have less harsh lending standards than traditional Union Bank small business loans and are chosen for minority small business owners who want to get a loan of up to $2.5 million. Loan products come with fixed or variable interest rates, with up terms up to 25 years.
7. Business Center for New Americans
The Business Center for New Americans (BCNA) provides business loans of $500 to $50,000 to minority business owners in the United States. The BCNA works explicitly with immigrants, refugees, women, and other minority entrepreneurs. These are short-term loans that must be paid back between six months to three years. They allow low, fixed-interest rates.
This organization encourages finance minority entrepreneurs who were rejected from traditional financing options for any number of reasons. The loan the borrower requested might have been too small, the bank would not lend to a startup, or the borrower’s credit score was too low. If you can show the capacity to repay the loan, you are likely to fit for a loan from BCNA. Because of the looser eligibility requirements, this program is also an excellent startup loan for minorities.
8. USDA Business Loans
As a final alternative for minority business loans, consider applying to the U.S. Department of Agriculture (USDA) Business and Industry Loan Guarantee Program. The USDA guarantees these loans, which local banks and direct lenders make to small businesses. The main qualification rule is that your business should be located in a rural area, described as a town with fewer than 50,000 inhabitants. USDA business loans are open to any qualified rural business, but they are an excellent choice for minority entrepreneurs, given that minorities in rural communities are more likely to live in substandard housing and are more likely to be poor.
USDA loans increase up to a maximum of $25 million. They can be put towards various business requirements, including working capital, real estate financing, business expansion, and debt refinancing. These are good options for business owners who need large amounts of capital. USDA loans come with low-interest rates, long terms, and require 10% to 20% down.
9. Business Consortium Fund Loan
Business Consortium Fund Loans are loans reserved specifically for minority-owned businesses that have not secured financing through other channels. Loans are certified by the U.S. Department of the Treasury and can range from $500 to $50,000. Interest rates are capped at 3% above the prime rate, and loan repayment terms can be as long as seven years.
To be qualified for a Business Consortium Fund Loan, you must certify your business with the National Minority Supplier Development Council (NMSDC) and have had a vendor or supplier relationship with an NMSDC national or regional corporate member.
Online Business Loans for Minorities
As you can notice, there are some great loan programs available to minority business owners. However, some of these alternates can be a hurdle to score due to high demand and limited capital resources. So, if you don’t qualify for any of the options mentioned above, try checking to see what you are eligible for with online small business loans available to all small business owners.
You might find the ideal loan for your business from one of the many lenders working in the small business financing space.
Here are the lenders we suggest:
OnDeck is an alternative lender that allows business loans in a broader credit spectrum. OnDeck gives both short-term loans and business lines of credit for borrowers with a minimum personal credit score of 600. You could qualify for up to $500,000 in financing with a quick, online application. OnDeck is an excellent option for minority business owners who need capital for just about any business need.
Fundation gives medium-term loans and business lines of credit. If you are looking for up to $500,000 in the capital, Fundation is a good option. Qualified borrowers will require to have at least a 660 credit score, making this slightly more challenging to qualify for than OnDeck. However, Fundation also offers more affordable financing, with interest rates starting at 8%. You can use the financing for most business needs.
BlueVine is our last online lender recommendation. This lender can grant short-term loans, lines of credit, and invoice financing, making them an extremely flexible lender to work with. To qualify, you will require around a 600 credit score and at least $100,000 in annual business revenues. With their short-term loan and line of credit products, you can obtain loan amounts up to $250,000 on a one-year term. BlueVine can also factor up to $5 million in monthly invoices.
Other funding options for minorities
If you consider funding starts and ends with term loans and microloans, think again. Minority business owners have other financing alternatives.
Grants give your business free money. You do not have to return them, and most business grant applications will not ask for things like credit history or annual revenue, making them a highly desirable alternative.
Many business grants for minorities exist. For instance, the Asian Women Giving Circle provides up to $15,000 to businesses led by Asian American women, and the First Nations Development Institute provides grants to Native nonprofits.
To get a minority business grant, you will have to find one you fit for and then apply. Most grants have many applications as everyone wants free money, so do not expect to be a shoo-in for a grant just because you match the basic qualifications.
You may have more success looking for local grants. Many organizations in your community might sponsor grants for minority business owners, and you will likely have more limited competition.
Angel investors invest in your business. Usually, they do this in trade for equity in the business. So you do not have to repay a loan, but you will have to give up some business earnings. Many entrepreneurs find this to be a fair trade-off.
While minority small-business owners get declined for loans at much higher rates than non-minority small-business owners, that gap mostly disappears when getting angel investors.
About 17% of entrepreneurs attempting to get funding from angel investors get it; for minority entrepreneurs specifically, 16.1% get the angel investor funding they seek for. So minority business owners would do well to see angel investors.
Research explains that some prominent minority-focused angel investment groups have come and gone, so you should do some work to find out who is currently working in the angel investing scene.
The Bottom Line
The regular minority-owned business in the United States worked with much less capital, even after controlling for factors impacting financing amounts, like a credit score. Fortunately, federal, state, local, and private loan programs are tailored to approach some of the hurdle minority small business owners encounter. The list we mentioned above should help you get started searching for small business startup loans for minorities capital.